Observations on the market action and the implications of the gold and silver markets.

Tuesday, January 29, 2008

Gold Price Versus Silver Price

How is the gold price doing versus the silver price. That depends on what point in time is being considered and what time period is being considered.

A period in time to look at:At the start (about 2000-2001) of this bull market it took about 70-80 ounces of silver to buy 1 ounce of gold. Now it is taking about 50 ounces of silver to buy 1 ounce of gold.

A point in time to look at:At the beginning of 1980 it took about 15 ounces of silver to buy 1 ounce of gold.

So, since 1980, gold has outperformed (increased its purchasing power more than) silver.Since 2001, silver has outperformed (increased its purchasing power more than) gold.

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Basic point:Silver is found in the ground about 16 times more often than gold. In a free market, an ounce of silver would be worth about 1/16 an ounce of gold. Historically this is the value/price ratio between the two metals.

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The US dollar price of gold is trying to play catch up to inflation, the increase in the supply of US dollars. Same goes for silver.

US dollar supplies:1980: M3 was about $1.8 trillion2007: M3 is about $13+ trillion

The supply of US dollars has grown about 7.2 times (13 divided by 1.8).

1980 USD price of gold: $8502007 USD price of gold, all other things being equal except the supply of USD, should be about $850 times 7.2 = $6120.

1980 USD price of silver: $502007 USD price of silver, all other things being equal except the supply of USD, should be about $50 times 7.2 = $360.

Or silver should be about the historic ratio of 16:1, or 1/16 the price that gold should be at, or $6120 divided by 16 = $383.